RUSSIAN ECONOMIC UPDATE: ITS GETTING WORSE

The Russian official figures for April have been released and we know how inaccurate they are, because they are so clearly massaged. Even so they are massaged to a formula and that continues to worsen. We also have data that’s not in the control of the Russian administration and that’s seriously problematic.

OIL & GAS INCOME

Overall, with a declining sales base due to Trumps tariff systems depressing the global economy, demand in March was down and prices are falling. The result was a 17% reduction in revenue for the month – an alarming amount for any country, never mind one so utterly dependent on oil for income. That equated to around an $8.4 billion reduction in income. Using Purchasing Power Parity (because a dollar in Russia buys around four times what it does in the US) that’s the equivalent in US terms of loosing around $33 billion.

The only way to counter this kind of loss is by borrowing it (from who? When the bond markets are basically inaccessible and only fools would offer to buy Russian bonds), to draw down the money from the meager amount left in the National Wealth Fund (which is estimated to be between 0 and $35bn), or ‘print’ the money which just stokes already rampant inflation and makes it worse.

Remember that Russia budgeted for $70 per barrel – knowing it still ends up giving discounts as high as 30%. It’s still giving the discounts and its actual sales price is around $44pb. With extraction costs averaging $26pb and transport costs at around $9 (most oil is crude and not refined), they’re making at best around $7pb.

In 2022 Russia was getting 45% of its income from oil sales – in 2025 that’s down to 25% – a staggering drop that no economy could easily sustain, let alone one geared up as Russia’s is at present and so dependent on one of its few money making commodities.

DEFICIT

The Russian budget deficit is running at $26.77 billion in March according to their own figures. That’s for the Q1 period – that money again comes out of the NWF – if there’s any left and indications suggest it’s largely gone. Remember too, that under PPP that’s the equivalent of over US$100 billion in buying power in the US to put it in context. Russia’s economy is the size of Canada or Italy.

Other indicators the NWF has been spent and that the Bank of Russia knows how dire things are, is that commercial banks have stopped lending money to Russian businesses – there’s been lots of chat about it but nothing official, and the volume of chat suggests it to be true. That means the government has stopped ‘printing’ money to inject into the economy because it’s proving counter productive by stoking inflation.

What that also means is that the state has stopped forced investment into armaments companies – one reason will be that those companies can’t handle the money in terms of repayments, or use the money because the labour shortages are so severe. The downside for them is they are now reliant only on state purchasing and government payments – which are rarely on time, placing the companies in an onerous position for which under Russian law, they are held accountable even if the state isn’t paying them.

Russia has also been forced into higher expenditure in the first quarter of the year- 25% higher – the costs of the war are severe. The manpower policy and death rate is costing billions, let alone recruitment costs. Yet they show no inclination to change the way they operate in the field despite the cost burden.

Putin himself indicated that Russia was spending far too much money, its deficit was ballooning and he seemed to understand there’s no way to just ‘invent’ the money without making things infinitely worse. His words were a word salad of contradictions but it was clear enough he knows Russia has to cut expenditure if its to survive. And the expenditure it needs to cut is in essence the cost of the war.

RUBLE ISSUES MAKE THINGS WORSE

The ruble is now around 82 to US$1. It’s appreciated about 17% this year. This would be interesting for Russia if it were not completely a result of its own Central Bank manipulations. The ruble doesn’t float openly on the market. The reason the values have changed: the Central Bank using foreign currency it has forced from companies trading abroad, that it gains almost as a tax. Companies must by law change any foreign currency 100% into rubles, the bank uses some of that foreign currency to change the value by buying rubles, while giving the companies fewer rubles for more of their foreign currency.

The trouble with his sleight of hand is that it makes exports more expensive. Instead the ruble amount being handed back to companies in exchange for their foreign currency is cutting into their profits which is in fact reducing the amount of tax they have to pay and worsening the governments deficit. The only way around this is to let the ruble devalue – wasting most of the effort to inflate it. All the Russians have done is steal from one hand only to realize the other has nothing left – and by wasting the money propping up the ruble in the first place, they have less than if they’d just left it alone and allowed companies to keep some of their profits. Short term gain has led to long term pain.

INFLATION

Over the past 12 months official inflation has risen from 7.7% to 10.3% and its still rising, unrestrained by the 21% interest rate which Putin personally interfered with to stop it going higher when the Central Bank would have raised it to 24%. There was a lot of backlash in the Duma over the possibility and the Russian mortgage system for household loans was based on a subsidized rate unrealistically set at around 4% – most people on that rate would be going from 4% to 24% overnight as the subsidies stopped. Trouble was expected. On top of that it was seen as likely to be the straw that broke the camels back for most of Russia’s remaining non-arms businesses. Putin backed down and overrode Elvira Niabulina’s plans. It didn’t stop record bankruptcies for non-arms companies. Russia’s only domestic TV manufacturer Kvant, was a high profile case. It discontinued production of its Irbis television sets at its Voronezh-based plant due to high costs.

Russia’s target rate is 4% inflation – higher than the usual 2% seen elsewhere. The results of course of higher inflation are higher pay demands, higher material costs, and food costs. Russia has the worlds 27th highest inflation rate – in line with basket case countries in Africa.

Official food inflation is 12.4% but there is plenty of evidence to show that’s not even vaguely true when it comes to fresh farm produce, and the Russians eat a lot of cucumbers, onions, cabbage and potatoes. Some of those have seen prices rise 35% or more. Worse still food inflation is actually accelerating faster than non-food inflation, at roughly double the rate.

FACTORY GATE PRICES

These are the prices that producers have to charge their customers. As an example in China FGP is stagnant or even reducing, while inflation is rising. Prices are going up in the general economy while at the same time producers cannot increase prices to cover their costs or nobody will buy their product. They loose money and eventually go out of business. This scenario is called stagflation.

In Russia producer prices are also dropping – but inflation is still rising, which means they too are trying to sell products at less than they are able to make a profit for. Inflation should be coming down as a result. But it’s not so there’s a huge disconnect when factory prices are only rising at 5.9% but inflation is almost twice that. The only conclusion can be that Russian imports – much of which is sanctioned – and the value of the ruble is sending inflationary pressures higher.

We know Russia is importing huge amounts of materials and components from China for the war. And the Chinese are only too happy to charge top dollar for them.

CONCLUSIONS

Oil and gas revenues are in free fall and undermining Russia’s finances. Trump tariffs were never aimed at Russia but they certainly have a massive impact on it.

Russian companies are making less money because of the ruble rate.

Prices and wages are still at unsustainable rates of inflation.

High ruble values and low oil income means Russia has to use what’s left of its reserves. At best those are probably $35 billion. At the rate Russia is burning through that it will last only to the end of Q3 if that far.

Overall Russia remains on target for bankruptcy and a severe financial shock in late summer/early autumn unless something changes things. They could return to printing money to get themselves out of a hole for a few months but it won’t last. Inflation will sky rocket and the corporate capability to absorb, use and repay stimulus money is exhausted.

Everywhere you look the Russian Central Bank and the MinFin are running out of options. What ever they can do they have done, often repeatedly. As I always said it would be an external shock out of Russian control that would send its economy off the rails – and the oil price has always been at the top of that list. Russia’s cash cow is dying before its eyes and there’s no easy way back. Trump cannot be seen to back off tariffs at this point – it’s more than his ego could stand. They keep lying about how marvelous everything will be, but it won’t be when the shelves are bare and the there’s nothing left but dropping tariffs to change things. Even if that happened it would take months and months for the oil price to recover and save Russia.

They have entered the death spiral. Now it’s just a matter of how it plays out.

The Analyst

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